It’s Tax Time! Will Itemizing Save You Money?
The new tax law federal income tax law includes an increase in the standard deduction amount. A tax deduction reduces your taxable income. For example, if your income is $50,000, but you have tax deductions of $5,000, then your taxable income is reduced to $45,000.
How much this deduction will save you will depend on your tax rate. Your tax rate (also known as your tax bracket) is the maximum tax rate that the highest portion of your income is charged. To use a general example, a person in the 22% tax bracket with a $1,000 deduction might save $220 in taxes.
When we file taxes, the government allows filers to choose between taking the “standard deduction” and itemizing deductions. You cannot do both. So the first thing a taxpayer needs to do is find out their standard deduction amount.
The standard deduction is based on filing status. For the 2018 tax year (that’s the return due April 2019) people) the standard deductions are:
- Single or Married Filing Separately* – $12,000
- Married Filing Jointly – $24,000
- Head of Household – $18,000
- If you are 65 or older or blind, the standard deduction is increased.
*When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction, and therefore must itemize to claim his or her deductions.
Next, check to see what you could deduct as an “itemized deduction” and add up these deductions. Compare the two totals to see which amount is larger.
What Can You Itemize?
Expenses that can be itemized include medical & dental expenses, mortgage interest, taxes paid, and charitable contributions. The new law eliminates the job expense deduction unless it is from self-employment income. The new law also says casualty and theft losses are only deductible if resulting from a federal disaster.
For many homeowners, the first thing to check is mortgage interest. If the amount of mortgage interest that you paid is greater than or close to your standard deduction, then it is likely that it will be to your advantage to itemize deductions. Home Equity Line of Credit (HELOC) interest is deductible if it is used to buy, build or substantially improve a taxpayer’s home that secures the loan. If the HELCO was used for something like paying off credit cards then it’s not deductible.
State and local taxes you paid up to a total of $10,000 are also deductible. This includes property taxes, and either local income tax or sales tax. In Florida we do not have a state income tax, but we can deduct sales tax. If you have not saved receipts, most tax software (including H&R Block’s free software at MyFreeTaxes.com) will calculate an amount based on IRS rules, your income, and local tax rate.
Qualified medical expenses that exceed 7.5% of your adjusted gross income can be itemized. For example if your adjusted gross income is $50,000 and your qualified unreimbursed medical expenses are $4,000, then you can deduct $250.